University of Illinois 
Library at 
Urbana-Champaign 
Oak St. 
Unclassified 


Pie ShOCKV EXCHANGE 
AS A MORAL FORCE 


An address before the 
New York Stock Exchange Institute 


By H. S. MARTIN 


First Assistant Secretary 


OCTOBER ELEVEN, NINETEEN HUNDRED TWENTY-THREE 


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OAK STREET 
UNCLASSIFIED 


THE STOCK EXCHANGE 
AS A MORAL FORCE 


An address before the 
New York Stock Exchange Institute 


By H. S. MARTIN 
First Assistant Secretary 


OCTOBER 11, 1923 


The Exchange has been discussed from many 
standpoints—its functions; its value as an economic 
factor; its necessity, in a commercial sense; its 
outstanding relation to the financial world; its 
alleged irresponsibility to public control; and its 
so-called powers for evil—have been considered by 
all kinds of publications, persons and legislators, 
advised or unadvised; but we are now to consider it 
from rather an unusual standpoint—its value as a 
moral force in the business world. 

At the outset, it may be said that it is usually 
unsafe to accept any statement at its face value. 
Having had some experience in early life as a teacher, 
I learned that certain statements are to be accepted 
as axioms—self-evident truths—such as, that 2 and 
2 make 4; and that a square has four equal sides and 
four equal angles; but there are so few self-evident 
truths, and so little that is said and printed is to be 
accepted as full truth that I soon found it desirable 
to separate most statements into their component 
parts and to analyze those parts; later, in my busi- 
ness experience, this habit of analysis has been of 
value in many ways; and following the practice 
thus set up, I naturally separate the subject of this 
address into three main parts: First, The Stock 
Exchange; Second, Moral; and Third, Force. And 
I hope you will all analyze what I say here today 


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and discover for yourselves what parts of my address 
are self-evident truths. 

We, who are employed by the Exchange in our 
varying capacities, get a varying idea of what it 
really is; when I came with the Exchange nearly 
twenty-five years ago it was being subjected to about 
as bitter a criticism as could possibly be made of any 
institution—‘‘gambling hell’? was a favorite term of 
opprobrium; “‘marked cards”? was another euphonism 
of those unfavorably disposed—and what with the 
other discreditable things said of my employer, you 
may be sure that I had some uneasiness of mind as 
to the desirability of continuing with an institution 
of which so many disagreeable, and at that time 
undenied, remarks were made; but, with my analyz- 
ing tendency, I set about to see what, if any, founda- 
tion there was for those statements, tinctured, I must 
confess, with misgivings of my own, due in part te 
my ignorance of the business but most largely due 
to the almost appalling indifference on the part of 
the Exchange to the attacks made upon it. 

You may be sure that I used every opportunity 
afforded me of getting at the actual facts in the 
matter; and that I am standing here today, speaking 
on the subject under consideration, shows what 
conclusion I arrived at in that matter. 

You, yourselves, as employees of the Exchange, 
are in a somewhat similar position to my own when 
coming with the Exchange; while the attacks upon 
the Exchange are not so continuous nor so severe as 
they have been in the past, you, nevertheless, are 
faced with misstatements as to its usefulness, its 
methods, and its purposes, and owe it to yourselves 
to discover the truth with regard to these factors. 

Morals may be briefly defined as “‘rules of right 
conduct.”” I am quoting from the Century Dic- 
tionary, which gives the following quotation, as 
illustrating the definition: 

“Take a moral act. What constitutes it 
moral? Its tendency is to promote the general 
welfare or good of mankind.” 


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The Constitution of the Exchange starts out by 
saying: 

“Its objects shall be—to maintain high 
standards of commercial honor and integrity 
among its members; and to promote and in- 
culcate just and equitable principles of trade 
and business.” 


And, in a recent address of the President of the 
Exchange, he said: 


“All that the members of the Exchange have 
to offer is service, and above all honest service.” 


Therefore, today, we have before us for consideration 
whether the Exchange promotes “the general welfare 
or good of mankind;’’ maintains “high standards of 
commercial honor and integrity among its members;”’ 
and renders “honest service.”’ 

A force may be defined as, “an active principle 
which can be depended upon to produce results of a 
given character’’—not necessarily fixed results, how- 
ever, as it is easy to see upon a little reflection. 
Natural forces, like gravity, inertia, and the like, 
may and do produce fixed results; chemical forces, 
such as explosions, certain forms of reaction, and the 
like, produce the looked-for results, but not neces- 
sarily absolutely dependable for fixity; and moral 
forces, such as law, education, conscience, the 
church, society, and the like, while calculated and 
intended to produce fixed results, fall short of such 
calculation and intention. 

The criticisms of the Exchange are due to varied 
causes, among them being the confusion of the 
Exchange and its members with outside brokers of a 
low moral or financial grade, a misunderstanding of 
the need for and actual purposes of the Exchange, 
and losses occurring to persons exercising little or 
no judgment in selecting their investments or their 
brokers. And much of this criticism has been and 
still is due, in the speaker’s opinion, to its own failure 
or neglect “‘to speak for itself.”” However, this atti- 


3 


tude has latterly been to some extent modified, and 
we trust will be modified to a greater extent in the 
near future. 

The ideal humanity would be one of one hundred 
per cent. perfection; the intent of all governments, 
churches, schools, social organizations, and kindred 
institutions is to produce as nearly one hundred per 
cent. perfection as possible; but we all know that, 
despite high ideals and moral and social teachings, 
and despite laws intended to produce perfection, men 
are to be found in all walks of life who prove recreant 
to the influences for good everywhere set up around 
them. ‘The Exchange is composed of 1,100 men, and 
it would be a miracle if among 1,100 men there should 
not be some who would yield to temptation; but it 
may be set down as an axiom that it is the intent of 
the Governing Committee that the personnel of the 
membership of the Exchange and their business 
methods shall be as nearly one hundred per cent. 
as is humanly possible. 

The Exchange is a speculative and investment 
market. We will not here consider speculation and 
investment; other speakers will define these terms, 
show their differences and the necessity for both, and 
coincidently, the necessity for the Exchange; but it 
may be said here that the feeblest mind should be 
able to easily distinguish between business (which 
may be either speculation or investment), and 
gambling, and can see that the buying and selling 
upon the Exchange is business, business only, and a 
most necessary and beneficial form of business. 
And that the twenty billions of dollars of listed stocks, 
and the twenty billion dollars of listed bonds repre- 
sent the highest class, the most solid, the most 
conservative, and the best-conducted railroad and 
industrial institutions in the known world; and that 
no other market has ever been devised which so 
surely and honestly reflects the value of those in- 
stitutions and affords opportunity to so readily 
either buy or sell an interest in those institu- 
tions. 


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You young men know, in a general way, that to be 
listed upon the Exchange a security must pass the 
scrutiny first of the Committee on Stock List and 
then of the Governing Committee; but you do not 
all know the intensity of that scrutiny and that in 
every case hundreds and in many cases thousands of 
items of every conceivable form of information must 
be furnished before the Committees will consider a 
listing, that the correctness of the statements made 
must be certified to by the company whose securities 
are applied for to be listed; and that the companies 
must agree to furnish varied further information to 
the Exchange and to stockholders, and to protect 
stockholders in many ways. Nor do you know that 
the requirements for listing have grown in extent 
from printed matter which in 1868 occupied two 
inches of space, to their present compass of approxi- 
mately thirty times the former size; and you may not 
know that the information required by the Exchange 
is far more extensive than that required by any 
governmental authority, even of the most rigid 
nature. 

Here, again, we face the matter of one hundred per 
cent. perfection, an impossible ideal, as we must all 
admit, but, nevertheless, the ideal of the Exchange. 
The vast majority of listed corporations are honestly 
managed; yet the failure to prosper by any listed com- 
pany is charged to the Exchange, when, as a matter of 
fact, it should bepraised for the wonderful improve- 
ment its efforts have forced in corporate management. 
No public body has brought about so great a change 
in the attitude toward publicity as has been produced 
by the unaided efforts of the Exchange. It has, in 
effect, said: “If you want the advantages of the 
market we afford, you must do your utmost in setting 
forth the facts regarding your organization.” Or | 
to put it as the Committee of the House of Repre- 
sentatives does: 

“It reserves the right to exact the minutest 
details of the business and affairs of the issuing 
corporation, to impose its will in the matter of 


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the procedure by which the corporation shall 
declare and pay interest and dividends, and in 
the matter of transfer and registry, and as re- 
gards endless other details.” 


And then follow these significant words: 
“All this is very properly done.” 


This is a recognition by the highest authority of 
something done for “the general welfare or good of 
mankind.” 

As to transfer and registry—in the old days, com- 
panies could and did issue additional stocks over- 
night, so that stockholders never could know what 
relation their holdings had to the assets or earning 
power of the corporation; this dishonest condition 
was not remedied by law—it was remedied by the 
Exchange, which requires that at least thirty days’ 
previous notice must be given of a proposed addi- 
tional issue, and for action by the stockholders 
themselves on the issue; and that all issues must be 
protected through registration by responsible insti- 
tutions not related to the corporation. 

You may not know that of the more than $300,000,- 
000,000 of wealth of the United States, approximately 
50% is represented by stocks and bonds; and while 
it is true that only about one-fourth of these are 
listed upon the Exchange, it cannot be overlooked 
or denied that the requirements of the Exchange 
have been the lever which raised the standard of 
what a security must be to be desirable for specula- 
tion or investment. Fifty-five years of continued 
and increasing insistence by the Exchange for facts, 
facts, facts, has had its effect upon the public mind 
with respect to securities whether listed or not. 

There are hundreds of thousands of holders of 
securities who are being protected by these require- 
ments. So generally have the precautions insisted 
upon by the Exchange been adopted, that it is almost 
impossible to find a security of value which does not 
follow these formalities in its issue. Therefore, 


8 


again we see that the Exchange has done much for 
the ‘“‘general welfare,” and thereby performed a 
moral act. 

To show that the Exchange has been years ahead 
of the Government in safeguarding the market, I will 
cite only two of many instances: Since 1868, the 
Exchange has demanded publication of statements 
by corporations; it was not until 1910 that the 
Government, through the Bureau of Corporations 
required such reports. ‘The Exchange since 1878 has 
been fighting bucketshops, at its own expense, 
unaided by any legal authority; the Government had 
so little conception of their innate dishonesty that 
by the 1898 Income Tax Law, while placing a $50 
annual tax on legitimate brokers, it permitted 
bucketshops to take out an annual license on pay- 
ment of $500; $50 to be permitted to do business, 
if honest; $500 if dishonest. 

Most of you know the adage: “Show me a liar, and 
I will show you a thief;’? meaning of course that 
most liars are essentially dishonest. If that be so, 
the reverse should also be true—that truthful men 
can be counted upon to be essentially honest. Well, 
if there is any one thing firmly established about the 
Exchange, it is that the word of a member must be 
lived up to—that a trade, once agreed upon, must 
be carried to its conclusion without regard to its 
monetary effect upon the parties to it: and that it 
cannot be cancelled except by consent of both parties. 
It is equally almost as well known that a common 
business practice in commercial lines is for a business 
man to order goods, and while those goods are in 
process of manufacture by the maker to change his 
mind, cancel the order, and possibly cause a loss to 
the manufacturer, the only remedy the manufacturer 
has being a money-and-time-consuming litigation. 
One of the Hughes Commission said to the speaker 
that during the panic of 1907 enough orders were 
canceled on his books to have caused his failure, 
had he not been fortunate enough to make provision 
to meet the situation. But by the rules of the 


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Exchange, the seller of a stock or bond on this 
Exchange knows that he can absolutely depend 
on receiving his money on the day it should be paid 
him. Such a rule in ordinary commercial business 
would revolutionize existing trade conditions. 

Therefore, in teaching that a word, once given, 
must be adhered to, the Exchange has performed a 
further moral act. 

Everyone knows that in buying merchandise he 
takes the risk of not getting what he has purchased, 
as to quality, time of delivery, and in other particulars. 
But the Exchange requires that exactly what has 
been bought must be delivered at the time it should 
be delivered, and, if for any reason it is not so 
delivered, means are at hand to enforce that delivery. 
And it goes a still further and important step—it 
requires that the selling member shall guarantee 
what he sells, and must stand behind the bona-fides 
of that sale to the value of his membership, and per- 
haps even beyond that point. This is certainly not 
a customary business practice; and it is certainly not 
a legal requirement—the legal axiom is “caveat 
emptor,’ which in ordinary United States means 
“let the buyer beware.”’ So that here we have an 
instance of that “‘high commercial honor”? which the 
Exchange states to be one of its objects. 

Every employee of the Exchange knows that every 
listed stock or bond is located at a definite’ place on 
the Floor of the Exchange; and that every trade 
in that stock or bond must be made openly at the 
particular place designated for transactions in that 
stock or bond; that every person interested has the 
opportunity to be represented by his broker; and 
that bids and offers must be publicly made, so that 
all at that location shall have opportunity to parti- 
cipate. The report of the House of Representatives 
Committee already referred to, says: ‘““The business 
transacted by its members comes to them from al- 
most every corner of the civilized world. Its hall- 
mark as to the genuineness of a certificate passes 
current everywhere, and is rightfully supervised with 


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jealous care.” \YVherefore we see that persons from 
all over the world are interested in transactions on 
the Exchange;.that no secret bargains are permitted, 
no collusive prices possible, that all have an oppor- 
tunity for representation and participation in the 
making of a price, and that “‘jealous care”’ is exercised 
by the Exchange in the matter. Certainly it cannot. 
be denied that honesty is promoted by the rules of’ 
the Exchange in this particular, and a moral purpose 
is thereby served. 

Just a moment ago, I referred to “money-and-time- 
consuming litigation.” ‘The Exchange has rules which 
can be appealed to, where disputes arise regarding a 
transaction. First of all, a customer who feels he 
has not received just treatment may appeal to the 
Committee on Business Conduct, which has power 
to inquire whether a transaction is honest; or he 
may appeal to the Arbitration Committee, which 
has power to decide questions relating to money 
matters arising between a customer and his member 
broker. Unlike disputes in other businesses, where 
such matters are either dragged along for months 
or years in a Court, and the poorer man, fearing delay 
and further loss allows himself to “‘be bluffed out of 
his rights,” these Committees can and do, in a very 
few days, come to a decision as to the facts in the 
case, and can and do render full and exact justice. 
When I tell you that a non-member has received a 
verdict for approximately $150,000 in a claim against 
a member, decided by the Arbitration Committee 
in a hearing lasting about six hours, and that the 
entire expense involved was $50, you can get some 
idea of how quickly and equitably such matters are 
settled by the authorities of the Exchange. Being 
an instance of how the Exchange promotes “just and 
equitable principles of trade and business.” 

You all know that every law of the United States 
and of this State is binding upon the members of the 
Exchange; but you may not know that the Exchange 
goes farther than the written laws and statutes in 
enforcing a code of morals and business ethics which 


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laws and statutes do not contemplate. The Govern- 
ing Committee can suspend or expel a member for 
an act which at law might go unpunished; the speaker 
knows of no law which penalizes “‘unmoral business 
procedure; but such procedure is not condoned 
by the Governors. Here no legal intricacies can be 
introduced; counsel cannot bring forward dilatory 
motions; witnesses cannot refuse or neglect to testify 
or absent themselves from jurisdiction; no officers 
can forget or overlook prosecution; the jurors are 
not selected as at law, because of their ignorance of 
the case—the case is heard and decision rendered 
by men skilled in the knowledge of the business and 
by judges of motives, and that decision is swift, 
positive and in accordance with justice. No dis- 
cipline administered by the Governing Committee 
has ever been reversed by a Court. And a man, so 
disciplined, is through. 

The Exchange also punishes for another cause, 
unknown to the law—reckless and unbusinesslike 
conduct; that is to say, even though no fraud or 
other legal offense has been committed, the very 
fact that a member has not conducted his business 
with regard to principles of “‘safety first, and always,” 
may cause his expulsion as though he had been actually 
criminal in his methods. It certainly again appears 
that “‘the general welfare’ has been promoted. 

We now come to the third principal word in our 
subject—Force. A force may be continuous or 
intermittent, according to its nature; moral force, 
however, implies continuous pressure. The Ex- 
change, acting as a moral force, therefore should 
apply a continuous, constant pressure toward at- 
taining its objects. Let us see if this is done, and how. 

The work of the Exchange is done by Committees; 
you all know that many of the Governors of the 
Exchange are personally present on the Floor on each 
business day, interested in observing the conduct of 
business; and that no form of evil, once observed, 
escapes attention at the hands of a Committee. 
Is there an attempt to make a false price? An attempt 


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to raid a stock, forcing it down below its current 
value? Or, by unusual buying to place it at a ficti- 
tious value? Immediately the matter is inquired 
into and the facts ascertained. 

For instance, during 1922, there were nearly 800 
meetings of Committees, concerned with the affairs 
of the Exchange and with operations on its Floor. 
Omitting Saturdays and Sundays, there are 261 days 
in the year; and omitting the 11 regular holidays, we 
have left 250 full business days on the Exchange; 
the Committee meetings therefore average three to 
each full business day. 

What do they consider? 

The Committee on Admissions passes upon candi- 
dates for membership; their qualifications, such as 
character, honesty, integrity, fitness for the business. 
Strange as il may seem, true toits attitudeas a moral 
force, the Exchange considers the wealth of the can- 
didate as inferior in importance to his character. 

The Committee of Arrangements passes upon the 
fitness of employees for their positions, and here 
again character is the chief qualification; this 
Committee passes upon the integrity of bids and 
offers, and other matters having to do with honest 
service by member and employee. 

The Committee on Business Conduct observes 
the course of prices; sees that no dishonest bargains 
are made; that the broker shall be honest in his 
dealings with his customer. Every detail of business, 
every inquiry of a customer no matter how trivial, 
is inquired into; every advertisement of a member 
is supervised; the Committee is empowered to visit 
the office of any member and examine into his 
dealings—all for the purpose of assuring honesty 
in transactions upon the Floor of the Exchange. 

The Committee on Quotations and Commissions 
passes upon the character and business integrity of 
partners, and of employees in offices of members, 
realizing that it is quite as important to have 
honesty in those offices as to have it upon the Floor 
of the Exchange; it also passes upon the names of 


13 


non-members who seek ticker or wire service, 
supervising these with great care, realizing that such 
facilities must not be extended to dishonest non- 
member brokers; it conducts campaigns against 
bucketshops, and has done much to purify the 
atmosphere in brokerage circles, driving from busi- 
ness those who prey upon speculators and investors 
under the guise of being brokers, when in fact they 
should bedesignated by otherand lesshonorableterms. 

The Committee on Stock List passes upon applica- 
tions to list securities, doing the detailed work already 
referred to; it also insists upon proper safeguards in 
the issue of securities to prevent forged issues and 
other dangers. When you reflect that the usual 
100-share certificatefor stock represents $10,000 in face 
value, you will well realize the desirability, nay, the 
absolute necessity for supervision in such matters. 

The Committee on Securities passes upon whether 
a certificate is properly issued, and is in proper shape 
for delivery. When on this Exchange a customer 
buys a share of stock or a bond, he gets with it, 
free of cost, an insurance and indemnity such as no 
other business furnishes—the guaranty of a member 
of the Exchange, which protects him from any pos- 
sibility of a flaw in title. The Exchange goes 
farther than the laws of New York in this protection 
—the law permits the buyer for value to retain legal 
possession of a stolen stock or bond; whereas the 
rule of the Exchange compels the return of that stock 
or bond to the man who dealt with the thief. 

Then there are other committees, whose functions 
it is not necessary to refer to in this address, but 
whose labors are for the benefit of the great public 
who are holders of securities, and desire an honest 
market, honestly administered. 

Over and above these is the Governing Committee; 
it may suspend a member for any act which it may 
deem detrimental to the interest or welfare of the 
Eixchange—and every act which has the slightest 
tinge of dishonesty or unfair business methods has 
always been considered detrimental to the Ex- 


14 


change; in the resolutions adopted by the Governing 
Committee are enumerated offenses punishable by 
suspension or expulsion which both common and 
statute law would or might overlook or excuse. 

Oh, yes, mistakes are made and have been made 
by the Exchange; issues have been listed upon 
erroneous, if not false, information by the issuing 
companies, but these have been not one in a hundred; 
and if one knew of the numbers of issues that have 
been refused listing, the fraction of mistakes would 
be so small as to be negligible; improper persons have 
been admitted to membership, to partnership, and 
to ticker and wire connections—here again, these 
have been so infrequent as to be similarly negligible 
by comparison; but these are regretted and not 
condoned; and are excluded when discovered. 

No—it is impossible for church or state or Ex- 
change to produce in every case one hundred per 
cent. men—and it is futile to expect them; the most 
that can be expected is that one hundred per cent. 
perfection shall be the ideal, and that every possible 
safeguard shall be employed toward arriving at that 
ideal; and considering the experience of the Ex- 
change in selecting its members, their partners, their 
employees, the non-member brokers who are per- 
mitted to deal with members, the stocks and bonds 
dealt in and the manner in which the dealings occur, 
the prices made and the method of their making, 
and the various minutiae of the business, it seems safe 
to say that the Exchange intends to arrive at and 
has succeeded in arriving at more nearly 100% men 
and dealings than any other business—private, cor- 
porate or governmental—known to the speaker, 
and that it can safely be placed foremost among the 
moral forces in the business world. 

You, as employees of the Exchange, have a part 
to perform in arriving at this ideal; should you see 
dishonesty, shun it, and report it; have no part in it, 
and make it your business to see that it is prevented; 
thus you will aid in arriving at the ideal of your em- 
ployer, the Exchange. 


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